Update: Payroll Tax Impasse Means No End in Sight for Congress

Since we initially posted this story on December 20, the House and Senate have approved a two month extension of the tax relief provisions on Friday, December 23.  This December 23 Associated Press story gives the updated state of play.

The Washington political community had hoped that last week's budget deal on spending would mean Congress would adjourn a full week before Christmas. That hope faded, though, when the House reconvened to reject the Senate-passed payroll tax relief extension bill. The House passed its version of the bill on December 13, and the Senate followed with a modified bill that passed on December 17. But then the House rejected the Senate bill, ostensibly because the Senate bill only extends the payroll tax benefit for two months, while the House version included a one-year extension.

The last-gasp week came on the heels of frenzied activity for higher education, with student aid spending levels being set, and the Department of Defense offering to revise a controversial new Memorandum of Understanding on higher education benefits for active duty military personnel. Unfortunately, less progress was made on expiring tax provisions also important to higher education.

A number of tax provisions will expire December 31 if not extended by Congress. Those of interest to higher education include the IRA charitable rollover, as well as the above-the-line deduction for tuition and related higher education expenses. While the current bills in the House and Senate would only extend the payroll tax benefit, there have been discussions about adding the rest of the 2011 expiring provisions to this vehicle as well.

In moving beyond the current legislative impasse, the tax bill still could be modified in subsequent deal-making, so the fate of the larger extender items is unclear. If Congress doesn't extend those larger items through an expiring-provision package before year's end, they still would likely extend them next year in a different tax bill. If that happens, the extension would be made retroactive - so that the expiration technically would have not existed - but this is always tricky and unstable tax policy.

The House and Senate are expected to continue negotiations over the payroll tax relief extension this week. Assumptions are that Congress will work out a compromise and pass something before adjourning, given that it's in no one's best interest politically to allow the payroll tax benefit to expire.

Congress would likely reconvene prior to the State of the Union Address, scheduled for January 24.

For more information, please contact:
Karin Johns